Firm Expectations and News: Micro v Macro

Benjamin Born, Zeno Enders, Manuel Menkhoff, Gernot Müller and Knut Niemann

No 400, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: Using firm-level data, we study how firm expectations adjust to news while accounting for a) the heterogeneity of news and b) the heterogeneity of firms. We classify news as either micro or macro, that is, information about firm-specific developments or information about the aggregate economy. Survey data for German and Italian firms allows us to reject rational expectations: Both types of news predict forecast errors at the firm level. Yet while firm expectations overreact to micro news, they underreact to macro news. We propose a general-equilibrium model where firms suffer from ‘island illusion’ to explain these patterns in the data.

Keywords: Survey data; salience; overreaction; underreaction; micro news; macro news; island illusion; business cycle (search for similar items in EconPapers)
JEL-codes: C53 D84 E71 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-bec, nep-eur, nep-ger and nep-sbm
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Related works:
Working Paper: Firm expectations and news: Micro v macro (2023)
Working Paper: Firm Expectations and News: Micro v Macro (2022)
Working Paper: Firm Expectations and News: Micro v Macro (2022)
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